The U.S. banking system is currently in turmoil, with several banks struggling to stay afloat and others facing unprecedented financial difficulty.
Banks are closing, mergers are happening, and bailouts are becoming the norm. It is an alarming situation and one that is causing serious concern within the banking industry, particularly concerning the long-term implications for customers and businesses.
But could this banking crisis also positively impact the crypto ecosystem? Crypto observers believe the banking crisis could strengthen the crypto ecosystem in the long term.
Banks’ Problems And Long-Term Crypto Ecosystem Success
Market watchers argue that despite the bearish sentiment that has recently taken hold in the crypto world, the continued disruption of crypto-dedicated banks could prove advantageous for the crypto ecosystem in the long run. Last week, a dramatic drop in the financial markets occurred due to regulators shutting down Silicon Valley Bank, with investors withdrawing their funds quickly.
The crypto market was further affected when news broke that USD Coin (USDC) issuer Circle couldn’t access its reserves worth over $3.3 billion at Silicon Valley, resulting in USDC redemptions and the coin’s value dropping to as low as 87 cents.
Despite the crash of these crypto-friendly banks, founders and developers of crypto-related projects are still determined to advance the crypto ecosystem regardless of any examination. In the short term, this process of unbanking could lead to a heightened regulatory oversight of crypto and the banking support services that sustain it.
Also, it could lead to a more remarkable examination of crypto’s potential to produce systemic risk, according to Ramani Ramachandran, co-founder, and CEO of Router Protocol. He further noted that this would also mean more attention on other stablecoins, notably USDT, which were already under scrutiny before the recent issues with Circle.
Government’s Efforts To Hamper Crypto Adoption
Jonathan Zeppettini, the Head of Strategy at Decred, has stated that the issue with Silvergate, Silicon Valley Bank, and Signature is a mix of several elements. Banks not managing interest rate risk correctly, and a typical bank run due to the lack of liquidity.
Hence, banks must take losses if they do not hold those resources until maturity. The last element is regulatory authorities taking advantage of the situation by requiring the dissolution of banks deemed “crypto-friendly.”
In Zeppettini’s opinion, governments’ efforts to reduce liquidity hamper the progress of less-regulated actors and could harm cryptocurrency adoption. However, Zeppettini believes that the same restrictive measures may, paradoxically, lead to a more stimulating crypto-economic environment.
He argued that stricter regulation could encourage exchanges and other industry players to relocate to friendlier jurisdictions, resulting in better infrastructure and less hostility for the crypto sector.